Market Plus: Feb 13, 2009: Alan Brugler

Pearson: Welcome to the Friday, February 13th, 2009 version of Market Plus. We're glad you've joined us here at our Market to Market Web site. Tell your friends and neighbors to join us here as well and, of course, contact your local public television station so you can catch our program weekly on your local PBS station. With us this week is one of our regular market analysts, Alan Brugler. Alan, a couple of things we want to talk about. First of all, the big news this week in the general economy was the stimulus package, $798 billion that is going to be going into the economy as a stimulus. what is your impression of that? Where do you think we're headed on the general economic front?

Brugler: Well, I think we needed some stimulus. Clearly you need to jump start some of these factors -- I have a little trouble with how much is going to reach the housing sector which I think is one of the core problems here and I have a little problem with the spreading out of the payments of the stimulus over two or three years. It seems like not a lot of it is getting up front. But the principle behind it is if you're spending three quarters of a trillion dollars you are injecting a lot of money into the system and it could be bullish on commodities. And here's the scenario -- we're downsizing production of goods and services, that's what the unemployment reports are telling you, that's what the lower chicken numbers and lower hog numbers, lower cattle numbers are telling you. At the moment the money that we're spending, both the feds and the congressional packages, is kind of going to fill a hole where we've got a balloon that's leaking or use your metaphor. Once we get that stabilized it looks like these packages are going to continue to pump put money and the definition of inflation is too much money chasing too few goods so I think we're getting set up for a scenario where we'll have too much money chasing too few goods. The timing is real questionable but certainly ag would be a participant in that kind of a scenario and I think the federal reserve would let commodity prices go up for four or five months in that scenario just to make sure the deflation, depression kind of dragon was dead before they started to raise interest rates.

Pearson: So, you think it will be inflationary then longer term?

Brugler: In the long-term unless things are a lot worse than we think they are in terms of the general economy and nobody knows for sure. But if there is a bull scenario in terms of prices more than garden variety weather rallies that is probably where it comes from. Now, whether that is late '09 or 2010, 2011 I don't know.

Pearson: Well, it does kind of put some dollars out there that could add on the demand side to commodities which is always a good thing and inflation has always been one place where agriculture historically has benefited.

Brugler: We seem to benefit from it. Obviously if your inputs start going up faster than your outputs -- historically it's better than deflation where you just don't have any room to maneuver.

Pearson: How is this going to play out with all of our markets? And also talk about South America and what's happening there. We've seen all these reports of 20% decline in corn production down in South America and now we're hearing the rains have come. You talk to a lot of people down there. Where is your impression?

Brugler: Basically there's definitely been some damage done primarily in Argentina. There was a dry spell there in Brazil earlier in the spring but the thing you have to remember is just like here soybeans will kind of hunker down and just wait on rain until they get to the actual flowering stage and my problem with basing the whole commodity rally or the corn and soybean rally on the weather down there was that we were trying to rally beans when the crops that were most effective, the states that were most effective were the corn growing areas. Clearly the corn production has dropped. The USDA showed us that on Tuesday. They also cut the soybean production for Argentina, for example, by a little until six million tons. But, again, USDA by going with a 43.8 million ton estimate is basically saying that the crop is going to end up being better than what the Brazilian futures exchange and some of the other analysts down there said. And I think my analysis and what I'm hearing from folks down there is that as long as we get normal rains from here on out that's probably right. The crop is responding to the rain it got there the first of August in terms of their growing season.

Pearson: The South American picture may be not as bad as what we were thinking it would have been say ten days ago.

Brugler: That's correct. Clearly there's been some damage and to the degree that the Chinese and the other buyers continue to soak up supplies that will help our prices. But we probably have seen the maximum impact of that South American weather.

Pearson: I want to ask you about biofuels. What is your take for demand going forward? We saw USDA's number used on the show, 4.5 billion bushels, do you think we'll use that much?

Brugler: I think that's probably a little high based on what we know today. The ten year forecasts were done a couple of months ago before we had all the plants shut down or as many of the plants shut down. Clearly the corn use for biofuels will continue to grow because of the mandates and because a lot of the plants that are currently shut down will be brought back online by a new buyer. But we're taking a hit for this year and we've got to get the margins a little better, the spread between the ethanol and the gasoline if we want to make any money at it and keep those plants using corn.

Pearson: Producers, what are you telling a room full of farmers these days? 2009 is challenging?

Brugler: Challenging -- the main thing I'm emphasizing is that our price compass is off. The high prices that we had in 2008, record high prices, have skewed everybody's value perception as to what they deserve or what they ought to be able to get for selling prices. I'm trying to get everybody back to a more realistic perspective of what a 10% supply and demand stocks to use ratio should mean in prices because otherwise you'll be sitting there hoping and waiting for $12 beans and they never come. I'm trying to give guys hope or expectations that there will still be trading ranges, there will still be rallies to sell but not to get too screwed up by what happened to them last year on the pricing.

Pearson: We're not going to see 2008 over again.

Brugler: Unless the hyperinflation scenario kicks in.

Pearson: There we go. Alan Brugler, thank you so much. As usual, some great insights, we appreciate you being with us. And for all of you who joined us here on Market Plus thanks for joining us. Again, call your local PBS executive and say we want Market to Market on our local station. For all of us here on Market to Market, I'm Mark Pearson. Have a great week.

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